Valero Energy (VLO) 10-K risk factor changes: FY2016 vs FY2015

Our financial results are affected by volatile refining margins, which are dependent upon factors beyond our control, including the price of crude oil and the market price at which we can sell refined [added: petroleum] products.

Our financial results are primarily affected by the relationship, or margin, between refined [added: petroleum] product prices and the prices for crude oil and other feedstocks.

Our cost to acquire feedstocks and the price at which we can ultimately sell refined [added: petroleum] products depend upon several factors beyond our control, including regional and global supply of and demand for crude oil, gasoline, diesel, and other feedstocks and refined [added: petroleum] products.

These in turn depend on, among other things, the availability and quantity of imports, the production levels of U.S. and international suppliers, levels of refined [added: petroleum] product inventories, productivity and growth (or the lack thereof) of U.S. and global economies, U.S. relationships with foreign governments, political affairs, and the extent of governmental regulation.

We may purchase our crude oil and other refinery feedstocks long before we refine them and sell the refined [added: petroleum] products.

Price level changes during the period between purchasing feedstocks and selling the refined [added: petroleum] products from these feedstocks could have a significant effect on our financial results.

Lower levels of economic activity could result in declines in energy consumption, including declines in the demand for and consumption of our refined [added: petroleum] products, which could cause our revenues and margins to decline and limit our future growth prospects.

Worldwide refining capacity expansions may result in refining production capability exceeding refined [added: petroleum] product demand, which would have an adverse effect on refining margins.

These crude oil feedstock differentials vary significantly depending on overall economic conditions and trends and conditions within the markets for crude oil and refined [added: petroleum] products, and they could decline in the future, which would have a negative impact on our results of operations.

Our operations are subject to extensive environmental laws and regulations, including those relating to the discharge of materials into the environment, waste management, [removed: pollution prevention measures, greenhouse gas (GHG) emissions, and characteristics and composition of fuels, including gasoline and diesel.]

[added: Certain of these laws and regulations could impose obligations to conduct] assessment or remediation efforts at our facilities as well as at formerly owned properties or third-party sites where we have taken wastes for disposal or where our wastes have migrated.

We may be required to make expenditures to modify [removed: operations] [added: operations, discontinue use of certain process units (e.g., HF alkylation),] or install pollution control equipment that could materially and adversely affect our business, financial condition, results of operations, and liquidity.

For example, the U.S. Environmental Protection Agency (EPA) has, in recent years, adopted final rules making more stringent the National Ambient Air Quality Standards (NAAQS) for ozone, sulfur dioxide, and nitrogen [removed: dioxide, and the U.S. EPA is considering further revisions to the NAAQS.][added: dioxide.]

Governmental regulations regarding GHG [removed: emissions–including so-called “cap-and-trade” programs targeted at reducing carbon dioxide emissions–and] [added: emissions and] low carbon fuel standards could result in increased compliance costs, additional operating restrictions or permitting delays for our business, and an increase in the cost of, and reduction in demand for, the products we produce, which could have a material adverse effect on our financial position, results of operations, and liquidity.

The Paris [removed: Agreement will be open for signing on] [added: Agreement, which was signed by the U.S. in] April [removed: 22,] 2016, [removed: and will require] [added: requires] countries to review and “represent a progression” in their intended nationally determined contributions (which set GHG emission reduction goals) every five years beginning in 2020.

If we are unable to obtain adequate crude oil volumes or are able to obtain such volumes only at unfavorable prices, our results of operations could be materially adversely affected, including reduced sales volumes of refined [added: petroleum] products or reduced margins as a result of higher crude oil costs.

In May 2015, the Pipeline and Hazardous Materials Safety Administration [added: (PHMSA)] and the Federal Railroad Administration [added: (FRA)] issued new final rules for enhanced [removed: tank car standards and operational controls for high-hazard flammable trains.]

The refining and marketing industry is highly competitive with respect to both feedstock supply and refined [added: petroleum] product markets.

We compete with many companies for available supplies of crude oil and other feedstocks and for sites for our refined [added: petroleum] products.

We currently maintain investment-grade ratings by Standard & Poor’s Ratings [removed: Services (S&P),] [added: Services,] Moody’s Investors [removed: Service (Moody’s),] [added: Service,] and Fitch Ratings [removed: (Fitch)] on our senior unsecured debt.

Significant interruptions in our refining system could also lead to increased volatility in prices for crude oil feedstocks and refined [added: petroleum] products, and could increase instability in the financial and insurance markets, making it more difficult for us to access capital and to obtain insurance coverage that we consider adequate.

For example, coverage for hurricane damage is very limited, and coverage for terrorism risks includes very broad [removed: exclusions.]

New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result in increased expenditures for tax [added: liabilities in the future.]

[removed: In connection with the private letter ruling, we also obtained an] opinion from a nationally recognized accounting firm, substantially to the effect that, for U.S. federal income tax purposes, the Spin-off qualified under sections 355 and 361 of the Code.

[added: In addition, we would] recognize gain in an amount equal to the excess of the fair market value of shares of CST common stock distributed to our holders on the Spin-off date over our tax basis in such shares of CST common stock.

pollution prevention measures, greenhouse gas (GHG) emissions, and characteristics and composition of fuels, including gasoline and diesel.

While the current administration is considering withdrawal from the Paris Agreement, there are no guarantees that it will not be implemented.

Compliance with the U.S. Environmental Protection Agency Renewable Fuel Standard could adversely affect our performance.

The U.S. EPA has implemented a Renewable Fuel Standard (RFS) pursuant to the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007.

The RFS program sets annual quotas for the quantity of renewable fuels (such as ethanol) that must be blended into transportation fuels consumed in the United States.

A Renewable Identification Number (RIN) is assigned to each gallon of renewable fuel produced in or imported into the U.S. As a producer of petroleum-based transportation fuels, we are obligated to blend renewable fuels into the products we produce at a rate that is at least commensurate to the U.S. EPA’s quota

and, to the extent we do not, we must purchase RINs in the open market to satisfy our obligation under the RFS program.

We are exposed to the volatility in the market price of RINs.

We cannot predict the future prices of RINs.

RINs prices are dependent upon a variety of factors, including U.S. EPA regulations, the availability of RINs for purchase, the price at which RINs can be purchased, and levels of transportation fuels produced, all of which can vary significantly from quarter to quarter.

If sufficient RINs are unavailable for purchase or if we have to pay a significantly higher price for RINs, or if we are otherwise unable to meet the U.S. EPA’s RFS mandates, our results of operations and cash flows could be adversely affected.

tank car standards and operational controls for high-hazard flammable trains.

In August 2016, PHMSA and FRA adopted a final rule expanding the requirements and mandating additional controls for enhanced tank cars.

exclusions.

In connection with the private letter ruling, we also obtained an

Certain of these laws and regulations could impose obligations to conduct

liabilities in the future.

In addition, we would

The Spin-off is more fully described in Note 3 of Notes to Consolidated Financial Statements.

| • | anticipated levels of crude oil and refined [added: petroleum] product inventories; |

| • | anticipated trends in the supply of and demand for crude oil and other feedstocks and refined [added: petroleum] products in the regions where we operate, as well as globally; |

| • | acts of terrorism aimed at either our facilities or other facilities that could impair our ability to produce or transport refined [added: petroleum] products or receive feedstocks; |

| • | political and economic conditions in nations that produce crude oil or consume refined [added: petroleum] products; |

| • | demand for, and supplies of, refined [added: petroleum] products such as gasoline, diesel, jet fuel, petrochemicals, and ethanol; |

| • | changes in the cost or availability of transportation for feedstocks and refined [added: petroleum] products; |

| • | the volatility in the market price of biofuel credits (primarily [removed: Renewable Identification Numbers (RINs)] [added: RINs] needed to comply with the [removed: U.S. federal Renewable Fuel Standard)] [added: RFS)] and GHG emission credits needed to comply with the requirements of various GHG emission programs; |

| • | earthquakes, hurricanes, tornadoes, and irregular weather, which can unforeseeably affect the price or availability of natural gas, crude oil, grain and other feedstocks, and refined [added: petroleum] products and ethanol; |

For the year ended December 31, 2015, we reported net income attributable to Valero stockholders from continuing operations of $4.0 [removed: billion, or $7.99 per share (assuming dilution), compared] [added: billion and adjusted net income attributable] to [removed: $3.7 billion, or $6.97 per share (assuming dilution), for the year ended December 31, 2014.][added: Valero stockholders from continuing operations of $4.6 billion.]

[removed: This matter] [added: The transfer of ownership of the Aruba Refinery and the Aruba Terminal to the GOA] is more fully described in Note [removed: 6] [added: 2] of Notes to Consolidated Financial Statements.

| | [removed: |] 2015 | | | | 2014 | | | | Change | | |

| Operating income (loss) by [removed: business] segment: | | | | | | | | | | | | |

| Corporate [removed: |] [added: segment] | (757 | | ) | | (768 | | ) | [removed: | 11 | | |]

[added: | • | Refining segment -] The [removed: $2.1] [added: $4.4] billion [removed: increase] [added: decrease] in [removed: refining segment] [added: adjusted] operating income [removed: in 2015 compared to 2014] was [added: primarily] due to [removed: higher] [added: lower] margins on [removed: gasoline and other] refined [removed: products (e.g.,] petroleum [removed: coke, propane, sulfur,] [added: products] and [removed: lubes), partially offset by] lower discounts [removed: for most] [added: on light] sweet [added: crude oils] and sour crude oils relative to Brent crude [removed: oil and lower distillate] [added: oil, which also negatively impacted our refining] margins. [added: This is more fully described on pages 37 and 38. |]

Additional details and analysis of the changes in the operating income [added: and adjusted operating income] of our business segments and other components of net income [added: and adjusted net income] attributable to Valero stockholders [added: from continuing operations, including a reconciliation of non-GAAP financial measures used in this Overview to their most comparable measures reported under U.S. GAAP,] are provided below under “RESULTS OF [removed: OPERATIONS.”][added: OPERATIONS” beginning on page 27.]

On [removed: July 13, 2015,] [added: September 21, 2016,] our board of directors authorized [removed: us to] [added: our] purchase [added: of up to] an additional $2.5 billion of our outstanding common [removed: stock,] [added: stock (the 2016 program)] with no expiration [removed: date to such authorization, and we had $1.3 billion remaining available under that authorization as of December 31, 2015.][added: date.]

[removed: This transaction is further] [added: These assumptions are disclosed and] described in Note [removed: 4] [added: 12] of Notes to Consolidated Financial Statements.

Below [removed: is a summary of] [added: are several] factors that have impacted or may impact our results of operations during the first quarter of [removed: 2016:][added: 2017:]

(millions of dollars, except [added: share and] per share amounts)

| Cost of sales (excluding the lower of cost or market inventory valuation adjustment) [removed: (a)] [added: (e)] | 73,861 | | | | 118,141 | | | | (44,280 | | ) |

| Lower of cost or market inventory valuation adjustment [removed: (b)] [added: (a)] | 790 | | | | — | | | | 790 | | |

| [removed: Net] [added: Reconciliation of net] income attributable to Valero Energy Corporation [removed: stockholders: | | | |] [added: stockholders to adjusted net income attributable to Valero Energy Corporation stockholders] | | | | | | | |

| Earnings per common share – assuming [removed: dilution:] [added: dilution] | [added: $] | [added: 4.94] | | | [added: $] | [added: 7.99] | | | [added: $] | [added: (3.05] | [added: )] |

Refining [added: Segment] Operating Highlights

| Refining [removed: (c): | | | |] [added: segment] | | | | | | | |

| Operating income | $ | 6,973 | | | $ | 5,884 | | [removed: | $ | 1,089 | |]

| Throughput margin per barrel [removed: (a) (b) (d)] [added: (h)] | $ | 12.97 | | | $ | 11.05 | | | $ | 1.92 | |

| [removed: Operating] [added: Adjusted operating] income per barrel [added: (i)] | $ | 7.55 | | | $ | 5.60 | | | $ | 1.95 | |

| Throughput volumes (thousand [removed: BPD):] [added: BPD)] | | | | | | | | | | | |

| [removed: Feedstocks:] [added: Feedstocks] | | | | | | | | | | | |

| Yields (thousand [removed: BPD):] [added: BPD)] | | | | | | | | | | | |

| Other products [removed: (e)] [added: (g)] | 408 | | | | 423 | | | | (15 | | ) |

Refining [added: Segment] Operating Highlights [removed: by Region (a) (b) (f)]

| U.S. Gulf [removed: Coast: | | | |] [added: Coast region] | | | | | | | |

| [removed: Operating] [added: Adjusted operating] income [added: (d)] | $ | 3,978 | | | $ | 3,368 | | | $ | 610 | |

| Throughput margin per barrel [removed: (d)] [added: (h)] | $ | 12.27 | | | $ | 11.03 | | | $ | 1.24 | |

| [removed: Operating] [added: Adjusted operating] income per barrel [added: (i)] | $ | 6.85 | | | $ | 5.77 | | | $ | 1.08 | |

| U.S. [removed: Mid-Continent: | | | |] [added: Mid-Continent region] | | | | | | | |

| [removed: Operating] [added: Adjusted operating] income [added: (d)] | $ | 1,434 | | | $ | 1,323 | | | $ | 111 | |

| Throughput margin per barrel [removed: (d)] [added: (h)] | $ | 14.09 | | | $ | 13.63 | | | $ | 0.46 | |

This report includes references to financial measures that are not defined under U.S. generally accepted accounting principles (GAAP).

These non-GAAP financial measures include adjusted net income attributable to Valero stockholders, gross margin, and adjusted operating income.

We have included these non-GAAP financial measures to help facilitate the comparison of operating results between periods.

See the accompanying financial tables in “RESULTS OF OPERATIONS” for a reconciliation of these non-GAAP

financial measures to the most directly comparable U.S. GAAP financial measures.

In note (d) to the accompanying tables, we disclose the reasons why we believe our use of the non-GAAP financial measures provides useful information.

For the year ended December 31, 2016, we reported net income attributable to Valero stockholders from continuing operations of $2.3 billion and adjusted net income attributable to Valero stockholders from continuing operations of $1.7 billion.

The decrease in net income attributable to Valero stockholders from continuing operations of $1.7 billion and the decrease in adjusted net income attributable to Valero stockholders from continuing operations of $2.9 billion are outlined in the following table (in millions).

| | | 2016 | | | | 2015 | | | | Change | | |

| Net income attributable to Valero Energy Corporation stockholders from continuing operations | | $ | 2,289 | | | $ | 3,990 | | | $ | (1,701 | ) |

| Adjusted net income attributable to Valero Energy Corporation stockholders from continuing operations(1) | | 1,724 | | | | 4,614 | | | | (2,890 | | ) |

The decrease in both net income and adjusted net income attributable to Valero stockholders from continuing operations was due to lower operating income in 2016 compared to 2015 (net of the resulting decrease of $1.1 billion in income tax expense between the years).

Operating income decreased by $2.8 billion, while adjusted operating income decreased by $4.3 billion, as outlined by segment in the following table (in millions).

| | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | |

| | | Year Ended December 31, | | | | | | | | | | |

| | | 2016 | | | | 2015 | | | | Change | | |

| Refining | | $ | 3,995 | | | $ | 6,973 | | | $ | (2,978 | ) |

| Ethanol | | 340 | | | | 142 | | | | 198 | | |

| Corporate | | (763 | | ) | | (757 | | ) | | (6 | | ) |

| Total | | $ | 3,572 | | | $ | 6,358 | | | $ | (2,786 | ) |

| | | | | | | | | | | | | |

| Refining | | $ | 3,354 | | | $ | 7,713 | | | $ | (4,359 | ) |

| Ethanol | | 290 | | | | 192 | | | | 98 | | |

| Corporate | | (763 | | ) | | (757 | | ) | | (6 | | ) |

| Total | | $ | 2,881 | | | $ | 7,148 | | | $ | (4,267 | ) |

__________________________

| (1) | Net income and operating income have been adjusted for certain items that we believe are not indicative of our core operating performance and that may obscure our underlying business results and trends. Each of these adjustments is reflected in the tables on pages 28 and 29. Adjusted amounts are non-GAAP measurements. |

The $2.8 billion decrease in operating income was impacted by the net effect of noncash adjustments for a lower of cost or market inventory valuation adjustment and an asset impairment loss.

We have excluded such effects from adjusted operating income because we believe that these adjustments are not indicative of our core operating performance and may obscure the underlying business results and trends.

The resulting $4.3 billion decrease in adjusted operating income is primarily due to the following:

| • | Ethanol segment - The $98 million increase in adjusted operating income was primarily due to higher ethanol margins that resulted from lower corn prices combined with lower operating expenses, partially offset by lower margins on other co-products. This is more fully described on page 38. |

For the year ended December 31, 2016, margins were unfavorable compared to 2015, and thus far in the first quarter of 2017 margins have been mixed.

| • | Refining and ethanol product margins are expected to remain near current levels. |

| • | Crude oil discounts are expected to remain weak due to lower demand resulting from industry-wide refinery maintenance. |

In addition, these tables include financial measures that are not defined under U.S. GAAP and represent non-GAAP financial measures.

These non-GAAP financial measures are reconciled to their most comparable U.S. GAAP financial measures and include adjusted net income attributed to Valero stockholders, adjusted net income from continuing operations attributable to Valero stockholders, adjusted operating income, and gross margin.

In note (d) to these tables, we disclose the reasons why we believe our use of non-GAAP financial measures provides useful information.

2016 Compared to 2015

Included in our 2015 results was a noncash charge for a lower of cost or market inventory valuation adjustment recorded in December 2015 of $790 million ($624 million after taxes, or $1.25 per share (assuming dilution)), of which $740 million was attributable to our refining segment and $50 million was attributable to our ethanol segment.

Included in our 2014 results was a last-in, first-out (LIFO) inventory gain of $233 million ($151 million after taxes, or $0.29 per share (assuming dilution)) primarily related to our refining segment.

Our operating income increased $456 million from 2014 to 2015 as outlined by business segment in the following table (in millions):

| Refining | | $ | 6,973 | | | $ | 5,884 | | | $ | 1,089 | |

| Ethanol | | 142 | | | | 786 | | | | (644 | | ) |

| Total | | $ | 6,358 | | | $ | 5,902 | | | $ | 456 | |

However, excluding the effect of the lower of cost or market inventory valuation adjustment and the LIFO gain discussed above, total operating income for 2015 and 2014 was $7.1 billion and $5.7 billion, respectively, reflecting a $1.4 billion favorable increase between the years, with refining segment operating income of $7.7 billion and $5.6 billion, respectively, (a favorable increase of $2.1 billion) and ethanol segment operating income of $192 million and $782 million, (an unfavorable decrease of $590 million).

Our ethanol segment operating income decreased $590 million in 2015 compared to 2014 due to lower ethanol margins that resulted from lower ethanol and co-product prices, partially offset by lower corn feedstock costs.

In March 2015, we issued $600 million of 3.65 percent senior notes due March 15, 2025 and $650 million of 4.9 percent senior notes due March 15, 2045, and our consolidated subsidiary, VLP, borrowed $200 million under its revolving credit facility (the VLP Revolver), as further described in Note 10 of Notes to Consolidated Financial Statements.

On July 1, 2015, VLP repaid $25 million of the amount borrowed under the VLP Revolver.

Effective November 24, 2015, VLP completed a public offering of 4,250,000 common units at a price of $46.25 per unit and received net proceeds from the offering of $189 million after deducting the underwriting discount and other offering costs.

Energy markets and margins were volatile during 2015, and we expect them to continue to be volatile in the 2016.

| • | Gasoline margins have been volatile, but are expected to recover from seasonal lows in the near term as domestic and export demand is expected to increase. Distillate margins have been negatively impacted by mild winter temperatures and are also expected to recover from their seasonal lows. |

| • | Medium and heavy sour crude oil discounts are expected to remain wide as sour crude oil remains oversupplied. Fuel oil price weakness has also put pressure on heavy sour crude oil discounts. Sweet crude oil discounts are expected to remain weak on lower domestic sweet crude oil production and higher foreign sweet and sour crude oil imports. |

| • | Ethanol margins are expected to remain depressed as long as gasoline prices remain low. |

| • | A further decline in market prices of crude oil and refined products may negatively impact the carrying value of our inventories. |

| | | | | | | | | | | | |

See note references on page 32.

| Brent less Mars crude oil | 6.54 | | | | 6.75 | | | | (0.21 | | ) |

| LLS crude oil | 51.25 | | | | 96.78 | | | | (45.53 | | ) |

| LLS less Mars crude oil | 4.17 | | | | 3.96 | | | | 0.21 | | |

| Propylene less LLS | (3.57 | | ) | | 8.36 | | | | (11.93 | | ) |

| (b) | In December 2015, we recorded a lower of cost or market inventory valuation adjustment of $790 million ($624 million after taxes), of which $740 million is attributable to our refining segment and $50 million is attributable to our ethanol segment. In accordance with U.S. generally accepted accounting principles (GAAP), we are required to state our inventories at the lower of cost or market. Cost is primarily determined using the LIFO inventory valuation methodology, whereby the most recently incurred costs are charged to cost of sales in the statement of income and inventories are valued at base layer acquisition costs in the balance sheet. Market is determined based on an assessment of the net realizable value of our inventory. In periods where the market price of our inventory falls below cost, we record an inventory valuation adjustment to write down the value to market in accordance with U.S. GAAP. The lower of cost or market inventory valuation adjustment for the year ended December 31, 2015 has been excluded from (1) the segment and regional throughput margins per barrel and the regional operating income amounts for the refining segment, and (2) the gross operating income and the gross margin per gallon of production amounts for the ethanol segment. This adjustment is further discussed in Note 6 of Notes to Consolidated Financial Statements. |

| (c) | The LIFO gain of $233 million recorded in 2014 (see note (a)) and the lower of cost or market inventory valuation adjustment of $790 million recorded in 2015 (see note (b)) are reflected in refining operating income and ethanol operating income for the years ended December 31, 2015 and 2014, but are excluded from throughput margin per barrel and operating income per barrel for the refining segment, and from gross margin per gallon and operating income per gallon for the ethanol segment, respectively, as also described in notes (a) and (b). |

| (d) | Throughput margin per barrel represents operating revenues less cost of sales of our refining segment divided by throughput volumes. Gross margin per gallon of production represents operating revenues less cost of sales of our ethanol segment divided by production volumes. |

Refining segment operating income increased $1.1 billion from $5.9 billion in 2014 to $7.0 billion in 2015.

Excluding the effect of the lower of cost or market inventory valuation adjustment of $740 million in 2015 and the LIFO gain of $229 million in 2014, our refining segment operating income increased $2.1 billion.

to $2.79 per barrel in 2014, representing an unfavorable decrease of $0.42 per barrel.

Ethanol segment operating income was $142 million in 2015 compared to $786 million in 2014.

Excluding the effect of the lower of cost or market inventory valuation adjustment of $50 million in 2015 and the LIFO gain of $4 million in 2014, our ethanol segment operating income decreased $590 million.

We estimate that the decrease in the price of ethanol per gallon during 2015 had an unfavorable impact to our ethanol margin of approximately $800 million.

2014 Compared to 2013

| | 2014 | | | | 2013 (c) | | | | Change | | |

| Operating revenues | $ | 130,844 | | | $ | 138,074 | | | $ | (7,230 | ) |

| Cost of sales (b) | 118,141 | | | | 127,316 | | | | (9,175 | | ) |

| Refining | 3,900 | | | | 3,710 | | | | 190 | | |

| Retail | — | | | | 226 | | | | (226 | | ) |

| Ethanol | 487 | | | | 387 | | | | 100 | | |

| Refining | 1,597 | | | | 1,566 | | | | 31 | | |

| Retail | — | | | | 41 | | | | (41 | | ) |

We are exposed to market risks related to the volatility in the price of crude oil, refined [added: petroleum] products (primarily gasoline and distillate), grain (primarily corn), [added: soybean oil,] and natural gas used in our operations.

| • | forecasted feedstock and refined [added: petroleum] product purchases, refined [added: petroleum] product sales, natural gas purchases, and corn purchases to lock in the price of those forecasted transactions at existing market prices that we deem favorable. |

| 10% increase in underlying commodity prices | $ | [removed: (45] [added: 61] | [removed: )] | | $ | [removed: —] [added: (22] | [added: )] |

| 10% increase in underlying commodity prices | [removed: (127] [added: (45] | | ) | | [removed: (2] [added: —] | | [removed: )] |

| 10% decrease in underlying commodity prices | [removed: 126] [added: (61] | | [added: )] | | [removed: 7] [added: 11] | | |

See Note [removed: 20] [added: 19] of Notes to Consolidated Financial Statements for notional volumes associated with these derivative contracts as of December 31, [removed: 2015.][added: 2016.]

As of December 31, [removed: 2015,] [added: 2016,] there was an immaterial amount of gain or loss in the fair value of derivative instruments that would result from a 10 percent increase or decrease in the underlying price of the contracts.

See Note [removed: 20] [added: 19] of Notes to Consolidated Financial Statements for a discussion about these compliance programs.

The following table provides information about our debt [removed: obligations] [added: instruments] (dollars in millions), the fair values of which are sensitive to changes in interest rates.

We had no interest rate derivative instruments outstanding as of December 31, [removed: 2015 or 2014.][added: 2015.]

| Floating rate [added: (b)] | $ | 117 | | | $ | — | | | $ | — | | | $ | — | | | $ | 175 | | | $ | — | | | $ | 292 | | | $ | 292 | |

| | [removed: 2015] [added: 2017] | | | | [removed: 2016] [added: 2018] | | | | [removed: 2017] [added: 2019] | | | | [removed: 2018] [added: 2020] | | | | [removed: 2019] [added: 2021] | | | | There- after | | | | Total (a) | | | | Fair Value | | |

| Floating rate [added: (b)] | $ | [removed: 126] [added: 105] | | | $ | [removed: —] [added: 5] | | | $ | [removed: —] [added: 5] | | | $ | [removed: —] [added: 35] | | | $ | [removed: —] [added: 5] | | | $ | [removed: —] [added: 26] | | | $ | [removed: 126] [added: 181] | | | $ | [removed: 126] [added: 181] | |

As of December 31, [removed: 2015,] [added: 2016,] we had commitments to purchase [removed: $292] [added: $374] million of U.S. dollars.

Our market risk was minimal on these contracts, as all of them matured on or before [removed: January 31, 2016, resulting in a gain of $10 million in the first quarter of 2016.][added: February 1, 2017.]

| December 31, 2016: | | | | | | | |

| | December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Fixed rate | $ | — | | | $ | — | | | $ | 750 | | | $ | 850 | | | $ | — | | | $ | 6,224 | | | $ | 7,824 | | | $ | 8,701 | |

| Average interest rate | — | | % | | — | | % | | 9.4 | | % | | 6.1 | | % | | — | | % | | 5.6 | | % | | 6.0 | | % | | | | |

| Average interest rate | 1.4 | | % | | 3.4 | | % | | 3.4 | | % | | 2.5 | | % | | 3.4 | | % | | 3.4 | | % | | 2.1 | | % | | | | |

(a) Excludes unamortized discounts and debt issuance costs.

(b) As of December 31, 2016, we had an interest rate swap associated with $51 million of our floating rate debt, resulting in an effective interest rate of 3.85 percent.

The fair value of the swap was immaterial.

| | |

| --- | --- |

| December 31, 2014: | | | | | | | |

| | December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Fixed rate | $ | 475 | | | $ | — | | | $ | 950 | | | $ | — | | | $ | 750 | | | $ | 4,074 | | | $ | 6,249 | | | $ | 7,436 | |

| Average interest rate | 5.2 | | % | | — | | % | | 6.4 | | % | | — | | % | | 9.4 | | % | | 6.9 | | % | | 7.0 | | % | | | | |

| Average interest rate | 2.0 | | % | | — | | % | | — | | % | | — | | % | | — | | % | | — | | % | | 2.0 | | % | | | | |

| (a) | Excludes unamortized discount and fair value adjustments recorded when the debt was acquired in connection with a business combination. |

We incorporate by reference into this Item our disclosures made in Part II, Item 8 of this report included in Note [removed: 11] [added: 9] of Notes to Consolidated Financial Statements under the caption “Litigation Matters.”

[removed: We are reporting these proceedings to comply with SEC regulations, which require us to disclose certain information about proceedings arising under federal, state,] or local provisions regulating the discharge of materials into the environment or protecting the environment if we reasonably believe that such proceedings will result in monetary sanctions of $100,000 or more.

The Illinois EPA [added: (ILEPA)] has issued several Notices of Violation (NOVs) alleging violations of air and waste regulations at Premcor’s Hartford, Illinois terminal and closed refinery.

We [removed: are negotiating] [added: continue to negotiate] the terms of a consent order for corrective [removed: action.][added: action with the ILEPA.]

We currently have multiple outstanding Violation Notices (VNs) issued by the [removed: BAAQMD.][added: BAAQMD from 2013 to present.]

In the fourth quarter of [removed: 2015,] [added: 2016,] we entered into an agreement with BAAQMD to resolve various VNs and continue to work with the BAAQMD to resolve the remaining VNs.

Texas Commission on Environmental Quality (TCEQ) [removed: (Port Arthur] [added: (McKee] Refinery).

We continue to work with the [removed: TCEQ] [added: SCAQMD] to [removed: finalize] [added: resolve] these [removed: Agreed Orders.][added: NOVs.]

[removed: Quebec Ministry of] Environment [removed: (QME)] [added: Canada (EC)] (Quebec [removed: City] Refinery).

We are [removed: currently] working with the [removed: QME] [added: U.S. EPA] to resolve [removed: the NOV.][added: this matter.]

We are reporting these proceedings to comply with SEC regulations, which require us to disclose certain information about proceedings arising under federal, state,

U.S. EPA.

In our quarterly report for the quarter ended March 31, 2016, we reported that certain of our refineries had received one or more letters or demands from the Department of Justice on behalf of the U.S. EPA concerning proposed stipulated penalties under an existing consent decree.

Some of these penalty amounts are in excess of $100,000 but are still being evaluated.

We continue to work with the U.S. EPA to resolve these matters.

U.S. EPA (Ardmore Refinery).

In our quarterly report for the quarter ended June 30, 2016, we reported that we had received a penalty demand in the amount of $730,820 from the U.S. EPA for alleged reporting violations at our Ardmore Refinery.

We continue to work with the U.S. EPA to resolve this matter.

U.S. EPA (Meraux Refinery).

In November 2016, we received from the U.S. EPA Region 6 a draft Consent Agreement and Final Order related to a previous Risk Management Plan inspection at our Meraux Refinery, which included proposed penalties of $182,000.

San Francisco Regional Water Quality Control Board (RWQCB) (Benicia Refinery).

In our quarterly report for the quarter ended September 30, 2016, we reported that the RWQCB had issued a Notice of Administrative Civil Liability to our Benicia Refinery for alleged violations of the Refinery’s National Pollutant Discharge Elimination System permit, along with a proposed penalty of $197,500.

We have resolved this matter with the RWQCB.

In our quarterly report for the quarter ended June 30, 2016, we reported that we had received a proposed Agreed Order in the amount of $121,314 from the TCEQ as an administrative penalty for alleged excess emissions at our McKee Refinery.

We continue to work with the TCEQ to resolve this matter.

In our quarterly report for the quarter ended September 30, 2016, we reported that we were involved in a legal proceeding initiated by the EC alleging breaches of certain conditions at our Quebec Refinery of a directive issued under the Canadian Fisheries Act.

We continue to work with the EC to resolve this matter, which we believe will result in penalties in excess of $100,000.

In the fourth quarter of 2015, we entered into an agreement to resolve various NOVs, and we continue to work with the SCAQMD to resolve the remaining NOVs.

In our annual report on Form 10-K for the year ended December 31, 2014, we reported that we had received two proposed Agreed Orders from the TCEQ resolving multiple violations that occurred at our Port Arthur Refinery between May 2007 and April 2013.

In the fourth quarter of 2015, the QME issued a NOV for alleged excess emissions at our Quebec City Refinery.

For the fiscal year ended December 31, [removed: 2015][added: 2016]

The aggregate market value of the voting and non-voting common stock held by non-affiliates was approximately [removed: $31.3] [added: $23.6] billion based on the last sales price quoted as of June 30, [removed: 2015] [added: 2016] on the New York Stock Exchange, the last business day of the registrant’s most recently completed second fiscal quarter.

As of January [removed: 29, 2016, 470,392,665] [added: 31, 2017, 451,049,519] shares of the registrant’s common stock were outstanding.

We intend to file with the Securities and Exchange Commission a definitive Proxy Statement for our Annual Meeting of Stockholders scheduled for May [removed: 12, 2016,] [added: 3, 2017,] at which directors will be elected.

Portions of the [removed: 2016] [added: 2017] Proxy Statement are incorporated by reference in Part III of this Form 10-K and are deemed to be a part of this report.

The following table indicates the headings in the [removed: 2016] [added: 2017] Proxy Statement where certain information required in Part III of this Form 10-K may be found.

| Form 10-K Item No. and Caption | | | Heading in [removed: 2016] [added: 2017] Proxy Statement |

| [Items 1. & [removed: 2.](#s0527E8643BA75455A7A1C929F9E1F690)] [added: 2.](#sF67A87E0684553C0BA5EA6EEF6A9D4F5)] | [Business and [removed: Properties](#s0527E8643BA75455A7A1C929F9E1F690)] [added: Properties](#sF67A87E0684553C0BA5EA6EEF6A9D4F5)] | [removed: [1](#s0527E8643BA75455A7A1C929F9E1F690)] [added: [1](#sF67A87E0684553C0BA5EA6EEF6A9D4F5)] |

| | [Valero’s [removed: Operations](#s62CA33AC9B5450AEBA0D0C4E92F247E1)] [added: Operations](#s3EE2607385705C61A02AB37C225E2F24)] | [removed: [2](#s62CA33AC9B5450AEBA0D0C4E92F247E1)] [added: [3](#s3EE2607385705C61A02AB37C225E2F24)] |

| | [Environmental [removed: Matters](#s00B03A5D09205533B9486CB2C74224D7)] [added: Matters](#sDC91EE43286C5635966195A4B773BD4F)] | [removed: [11](#s00B03A5D09205533B9486CB2C74224D7)] [added: [10](#sDC91EE43286C5635966195A4B773BD4F)] |

| [Item [removed: 1A.](#sF0E46E436EE252DCBA80B6F63E84262C)] [added: 1A.](#s09D2147497505D18842E310534FA8A59)] | [Risk [removed: Factors](#sF0E46E436EE252DCBA80B6F63E84262C)] [added: Factors](#s09D2147497505D18842E310534FA8A59)] | [removed: [12](#sF0E46E436EE252DCBA80B6F63E84262C)] [added: [11](#s09D2147497505D18842E310534FA8A59)] |

| [Item [removed: 1B.](#s55C1FCDCCD375D9FAE3E2F81FF232063)] [added: 1B.](#s12B2F38234C45D02B864DA3B28A5AD63)] | [Unresolved Staff [removed: Comments](#s55C1FCDCCD375D9FAE3E2F81FF232063)] [added: Comments](#s12B2F38234C45D02B864DA3B28A5AD63)] | [removed: [18](#s55C1FCDCCD375D9FAE3E2F81FF232063)] [added: [17](#s12B2F38234C45D02B864DA3B28A5AD63)] |

| [Item [removed: 3.](#sE5B6E8E097AF55DB8BC123BAC689790D)] [added: 3.](#sF46038B7CEC85E13841332C8061E9BBD)] | [Legal [removed: Proceedings](#sE5B6E8E097AF55DB8BC123BAC689790D)] [added: Proceedings](#sF46038B7CEC85E13841332C8061E9BBD)] | [removed: [18](#sE5B6E8E097AF55DB8BC123BAC689790D)] [added: [17](#sF46038B7CEC85E13841332C8061E9BBD)] |

| [Item [removed: 4.](#s852285265D6B5F8589247106E3985665)] [added: 4.](#sB621FC5F78D652BE97119581D8530426)] | [Mine Safety [removed: Disclosures](#s852285265D6B5F8589247106E3985665)] [added: Disclosures](#sB621FC5F78D652BE97119581D8530426)] | [removed: [19](#s852285265D6B5F8589247106E3985665)] [added: [19](#sB621FC5F78D652BE97119581D8530426)] |

| [Item [removed: 5.](#sDE8EC10A233D5BBD80AAE81A5D1103A0)] [added: 5.](#s48B70B7780E1514BAD0947A8F8F4F6D2)] | [Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#sDE8EC10A233D5BBD80AAE81A5D1103A0)] [added: Securities](#s48B70B7780E1514BAD0947A8F8F4F6D2)] | [removed: [20](#sDE8EC10A233D5BBD80AAE81A5D1103A0)] [added: [19](#s48B70B7780E1514BAD0947A8F8F4F6D2)] |

| [Item [removed: 6.](#s4DC894CBCF6A582BA7EAD3C6ECC90294)] [added: 6.](#sE593993C760A561D8DFF046EE33F8E84)] | [Selected Financial [removed: Data](#s4DC894CBCF6A582BA7EAD3C6ECC90294)] [added: Data](#sE593993C760A561D8DFF046EE33F8E84)] | [removed: [23](#s4DC894CBCF6A582BA7EAD3C6ECC90294)] [added: [22](#sE593993C760A561D8DFF046EE33F8E84)] |

| [Item [removed: 7.](#s31CB771681625884BD4E7F7C78177716)] [added: 7.](#sAC57097D43F3543E80AE455664FF1CF8)] | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#s31CB771681625884BD4E7F7C78177716)] [added: Operations](#sAC57097D43F3543E80AE455664FF1CF8)] | [removed: [24](#s31CB771681625884BD4E7F7C78177716)] [added: [23](#sAC57097D43F3543E80AE455664FF1CF8)] |

| [Item [removed: 7A.](#sF2908D82CD9E591783430F886D21F81E)] [added: 7A.](#s8FCD06FC8F605907BA7501757A54D3C9)] | [Quantitative and Qualitative Disclosures About Market [removed: Risk](#sF2908D82CD9E591783430F886D21F81E)] [added: Risk](#s8FCD06FC8F605907BA7501757A54D3C9)] | [removed: [52](#sF2908D82CD9E591783430F886D21F81E)] [added: [64](#s8FCD06FC8F605907BA7501757A54D3C9)] |

| [Item [removed: 8.](#s3137B2CFFB8657E7862A6715D0C277A0)] [added: 8.](#sDDCCD32F2B2B5144A0A28B98C051A8BE)] | [Financial Statements and Supplementary [removed: Data](#s3137B2CFFB8657E7862A6715D0C277A0)] [added: Data](#sDDCCD32F2B2B5144A0A28B98C051A8BE)] | [removed: [55](#s3137B2CFFB8657E7862A6715D0C277A0)] [added: [66](#sDDCCD32F2B2B5144A0A28B98C051A8BE)] |

| [Item [removed: 9.](#s9AFF960CE58C53209B49AF91A894F948)] [added: 9.](#sE0B11D98A8C65E5080DF47C619B7F051)] | [Changes in and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#s9AFF960CE58C53209B49AF91A894F948)] [added: Disclosure](#sE0B11D98A8C65E5080DF47C619B7F051)] | [removed: [126](#s9AFF960CE58C53209B49AF91A894F948)] [added: [135](#sE0B11D98A8C65E5080DF47C619B7F051)] |

| [Item [removed: 9A.](#s3989301A690952A9AFAA73A2CD220CE4)] [added: 9A.](#s32BD8A23234750F8A6C037AA837BF1C8)] | [Controls and [removed: Procedures](#s3989301A690952A9AFAA73A2CD220CE4)] [added: Procedures](#s32BD8A23234750F8A6C037AA837BF1C8)] | [removed: [126](#s3989301A690952A9AFAA73A2CD220CE4)] [added: [135](#s32BD8A23234750F8A6C037AA837BF1C8)] |

| [Item [removed: 9B.](#s1A9C1B18FF1359AB8E1C17E6548CBF40)] [added: 9B.](#s4BC061A07608547DAA2AFA701955E9FD)] | [Other [removed: Information](#s1A9C1B18FF1359AB8E1C17E6548CBF40)] [added: Information](#s4BC061A07608547DAA2AFA701955E9FD)] | [removed: [126](#s1A9C1B18FF1359AB8E1C17E6548CBF40)] [added: [135](#s4BC061A07608547DAA2AFA701955E9FD)] |

| [Item [removed: 10.](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: 10.](#s2B17E69186555A7FA736AD141BBD6E7B)] | [Directors, Executive Officers and Corporate [removed: Governance](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: Governance](#s2B17E69186555A7FA736AD141BBD6E7B)] | [removed: [127](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: [136](#s2B17E69186555A7FA736AD141BBD6E7B)] |

| [Item [removed: 11.](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: 11.](#s2B17E69186555A7FA736AD141BBD6E7B)] | [Executive [removed: Compensation](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: Compensation](#s2B17E69186555A7FA736AD141BBD6E7B)] | [removed: [127](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: [136](#s2B17E69186555A7FA736AD141BBD6E7B)] |

| [Item [removed: 12.](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: 12.](#s2B17E69186555A7FA736AD141BBD6E7B)] | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: Matters](#s2B17E69186555A7FA736AD141BBD6E7B)] | [removed: [127](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: [136](#s2B17E69186555A7FA736AD141BBD6E7B)] |

| [Item [removed: 13.](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: 13.](#s2B17E69186555A7FA736AD141BBD6E7B)] | [Certain Relationships and Related Transactions, and Director [removed: Independence](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: Independence](#s2B17E69186555A7FA736AD141BBD6E7B)] | [removed: [127](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: [136](#s2B17E69186555A7FA736AD141BBD6E7B)] |

| [Item [removed: 14.](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: 14.](#s2B17E69186555A7FA736AD141BBD6E7B)] | [Principal Accountant Fees and [removed: Services](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: Services](#s2B17E69186555A7FA736AD141BBD6E7B)] | [removed: [127](#sFB12B610DDDB5FD1BB9AEF6BFDFD4D64)] [added: [136](#s2B17E69186555A7FA736AD141BBD6E7B)] |

| [Item [removed: 15.](#sCF04410BF5D9565C8773852E6756257A)] [added: 15.](#sE44AC37BFB425F81A176855E8D25E97B)] | [Exhibits and Financial Statement [removed: Schedules](#sCF04410BF5D9565C8773852E6756257A)] [added: Schedules](#sE44AC37BFB425F81A176855E8D25E97B)] | [removed: [127](#sCF04410BF5D9565C8773852E6756257A)] [added: [136](#sE44AC37BFB425F81A176855E8D25E97B)] |

You should read our forward-looking statements together with our disclosures beginning on page [removed: [24](#s15CF7492CFC157ED9AF5FEBE0BEFC069)] [added: 23] of this report under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.”

[removed: Our common stock trades on the New York Stock Exchange (NYSE) under the symbol “VLO.”] We were incorporated in Delaware in 1981 under the name Valero Refining and Marketing Company.

[removed: Our] [added: We own] 15 petroleum refineries [removed: are] located in the United States (U.S.), Canada, and the United Kingdom [removed: (U.K.).][added: (U.K.) with a combined throughput capacity of approximately 3.1 million barrels per day.]

Our refineries [removed: can] produce conventional gasolines, premium gasolines, gasoline meeting the specifications of the California Air Resources Board (CARB), diesel, low-sulfur diesel, ultra-low-sulfur diesel, CARB diesel, other distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined [added: petroleum] products.

We [removed: market branded and unbranded] [added: sell our] refined [added: petroleum] products [removed: on a wholesale basis] in [removed: the U.S., Canada, the Caribbean,] [added: both] the [removed: U.K.,] [added: wholesale rack] and [removed: Ireland through an extensive] bulk [removed: and rack marketing network] [added: markets,] and [removed: through] approximately [removed: 7,500] [added: 7,400] outlets [removed: that] carry our brand [removed: names.][added: names in the U.S., Canada, the U.K., and Ireland.]

Information on our website is not part of this [removed: annual report on Form 10-K.][added: report.]

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form [removed: 8-K] [added: 8-K, and any amendments to those reports,] filed with (or furnished to) the U.S. Securities and Exchange Commission (SEC) are available on our website (under “Investors”) free of charge, soon after we file or furnish such material.

[removed: We have] [added: As of December 31, 2016, we had] two reportable [removed: segments:] [added: segments —] refining and ethanol.

[removed: Our] [added: The] refining segment includes [added: our] refining [removed: and marketing operations in the U.S., Canada,] [added: operations,] the [removed: U.K., Aruba,] [added: associated marketing activities,] and [removed: Ireland.][added: logistics assets that support our refining operations.]

[removed: Our ethanol segment includes ethanol and marketing operations in the U.S.] Financial information about our segments is presented in Note [removed: 17] [added: 16] of Notes to Consolidated Financial Statements and is incorporated herein by reference.

[removed: The separation of] [added: Financial information about] our [removed: retail business] [added: properties] is [removed: discussed] [added: presented] in Note [removed: 3] [added: 5] of Notes to Consolidated Financial Statements and [removed: that discussion] is incorporated herein by reference.

[removed: On] [added: As of] December 31, [removed: 2015,] [added: 2016,] our refining operations included 15 petroleum refineries in the U.S., Canada, and the U.K., with a combined total throughput capacity of approximately [removed: 3.0] [added: 3.1] million barrels per day (BPD).

10-K 1 vloform10-kx12312016.htm 10-K

| [PART I](#s4C612E7A8ADA55039D07FEC348A48612) | | [1](#s4C612E7A8ADA55039D07FEC348A48612) |

| | [Segments](#sE63C840EFF7D51458FBDF759DA0703CD) | [2](#sE63C840EFF7D51458FBDF759DA0703CD) |

| | [Properties](#s9649F7E4A53257C5BB6D212FBB234801) | [10](#s9649F7E4A53257C5BB6D212FBB234801) |

| [PART II](#s05686FF5C47A5732AA437B67CFB2E550) | | [19](#s05686FF5C47A5732AA437B67CFB2E550) |

| [PART III](#sB44763B3F8B659CDA81F7177E15BE776) | | [136](#sB44763B3F8B659CDA81F7177E15BE776) |

| [PART IV](#s746DDE144147590E9DCDEEEA7CA224E5) | | [136](#s746DDE144147590E9DCDEEEA7CA224E5) |

| [Signature](#s236AC40A28ED54E287BCB92322120EA1) | | [140](#s236AC40A28ED54E287BCB92322120EA1) |

Our common stock trades on the New York Stock Exchange (NYSE) under the symbol “VLO.” On January 31, 2017, we had 9,996 employees.

Most of our logistics assets support our refining operations, and some of these assets are owned by Valero Energy Partners LP (VLP), a midstream master limited partnership majority owned by us.

We also own 11 ethanol plants in the Mid-Continent region of the U.S. with a combined production capacity of approximately 1.4 billion gallons per year.

We sell our ethanol in the wholesale bulk market, and some of our logistics assets support our ethanol operations.

AVAILABLE INFORMATION

The ethanol segment includes our ethanol operations, the associated marketing activities, and logistics assets that support our ethanol operations.

Effective January 1, 2017, we revised our reportable segments to align with certain changes in how our chief operating decision maker manages and allocates resources to our business and created a new reportable segment — VLP.

The results of VLP, which are those of our majority-owned master limited partnership referred to by the same name, were transferred from the refining segment.

Refining Operations

| | | | | 1,835,000 | |

of various feedstocks and blending components between them.

The contracts generally permit the parties to amend the contracts (or terminate them), effective as of the next scheduled renewal date, by giving

Overview

Wholesale Rack Sales

Logistics

We distribute our ethanol through logistics assets, which include railcars owned by us.

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | |

| • | Item 1A, “Risk Factors”—Compliance with the U.S. Environmental Protection Agency Renewable Fuel Standard could adversely affect our performance; |

10-K 1 vloform10-kx12312015.htm 10-K

| | |

| --- | --- |

| [PART I](#s7E9E50F308B55962A449AF0089EB0B35) | | [1](#s7E9E50F308B55962A449AF0089EB0B35) |

| | [Segments](#s61750E58B6E35FFAA9E572F61481536B) | [1](#s61750E58B6E35FFAA9E572F61481536B) |

| | [Properties](#sB718174B47A15026B0EE379E74C45ABA) | [11](#sB718174B47A15026B0EE379E74C45ABA) |

| [PART II](#sDC5F9047FB265977857D99ADDD6964C2) | | [20](#sDC5F9047FB265977857D99ADDD6964C2) |

| [PART III](#s59AF2FC1ABB5532BAD1C859A27583119) | | [127](#s59AF2FC1ABB5532BAD1C859A27583119) |

| [PART IV](#s37D6FDF7C1385BC894DDD37ADEB11F50) | | [127](#s37D6FDF7C1385BC894DDD37ADEB11F50) |

| [Signature](#sB876B71EC6AD59BDB558A8B5833F85E9) | | [131](#sB876B71EC6AD59BDB558A8B5833F85E9) |

Overview.

On January 31, 2016, we had 10,103 employees.

We also own 11 ethanol plants in the central plains region of the U.S. that primarily produce ethanol, which we market on a wholesale basis through a bulk marketing network.

Available Information.

We formerly had a third reportable segment: retail.

In 2013, we completed the separation of our retail business by creating an independent public company named CST Brands, Inc. (CST).

| | | | | 1,720,000 | |

Our total combined throughput volumes averaged approximately 2.8 million BPD for the year ended December 31, 2015.

| | petrochemicals | 3 | % |

Total throughput volumes for the U.S. Gulf Coast refining region averaged approximately 1.6 million BPD for the year ended December 31, 2015.

| | petrochemicals | 4 | % |

fuels, liquefied petroleum gases, and asphalt.

In 2015, we completed a 15,000 BPD hydrocracker expansion project at this refinery.

Total throughput volumes for the U.S. Mid-Continent refining region averaged approximately 447,000 BPD for the year ended December 31, 2015.

In 2015, we completed the final phases of a multi-year project, which increased the refinery’s crude oil processing capacity by approximately 20,000 BPD.

Total throughput volumes for the North Atlantic refining region averaged approximately 494,000 BPD for the year ended December 31, 2015.

| | petrochemicals | 1 | % |

| | other feedstocks | 11 | % |

Refining Segment Sales

Specialty Products

We sell a variety of other products produced at our refineries, which we refer to collectively as “Specialty Products.” Our Specialty Products include asphalt, lube oils, natural gas liquids (NGLs), petroleum coke, petrochemicals, and sulfur.

| • | We produce asphalt at five of our refineries. Our asphalt products are sold for use in road construction, road repair, and roofing applications through a network of refinery and terminal loading racks. |

| • | We produce naphthenic oils at one of our refineries suitable for a wide variety of lubricant and process applications. |

| • | NGLs produced at our refineries include butane, isobutane, and propane. These products can be used for gasoline blending, home heating, and petrochemical plant feedstocks. |

| • | We are a significant producer of petroleum coke, supplying primarily power generation customers and cement manufacturers. Petroleum coke is used largely as a substitute for coal. |

| • | We produce and market a number of commodity petrochemicals including aromatics (benzene, toluene, and xylene) and two grades of propylene. Aromatics and propylenes are sold to customers in the chemical industry for further processing into such products as paints, plastics, and adhesives. |

| • | We are a large producer of sulfur with sales primarily to customers serving the agricultural sector. Sulfur is used in manufacturing fertilizer. |

Logistics and Transportation

VLP is a midstream master limited partnership.

After processing, our ethanol is held in storage tanks on-site pending loading to rail cars, trucks and barges.

As of January 31, [removed: 2016,] [added: 2017,] there were [removed: 5,911] [added: 5,751] holders of record of our common stock.

The following table shows the high and low sales prices of and dividends declared on our common stock for each quarter of [removed: 2015] [added: 2016] and [removed: 2014.][added: 2015.]

| December 31 | | [removed: $ |] 73.88 | | | [removed: $] | 58.98 | | | [removed: $] | [removed: 0.500] [added: 0.50] | | [added: |]

| September 30 | | 71.50 | | | | 51.68 | | | | [removed: 0.400] [added: 0.40] | | |

| June 30 | | 64.28 | | | | 56.09 | | | | [removed: 0.400] [added: 0.40] | | |

| March 31 | | 64.49 | | | | 43.45 | | | | [removed: 0.400] [added: 0.40] | | |

On January [removed: 21, 2016,] [added: 26, 2017,] our board of directors declared a quarterly cash dividend of [removed: $0.60] [added: $0.70] per common share payable March [removed: 3, 2016] [added: 7, 2017] to holders of record at the close of business on February [removed: 9, 2016.][added: 15, 2017.]

The following table discloses purchases of shares of our common stock made by us or on our behalf during the fourth quarter of [removed: 2015.][added: 2016.]

| (a) | The shares reported in this column represent purchases settled in the fourth quarter of [removed: 2015] [added: 2016] relating to (i) our purchases of shares in open-market transactions to meet our obligations under stock-based compensation plans, and (ii) our purchases of shares from our employees and non-employee directors in connection with the exercise of stock options, the vesting of restricted stock, and other stock compensation transactions in accordance with the terms of our stock-based compensation plans. |

The following line graph compares the cumulative total return1 on an investment in our common stock against the cumulative total return of the S&P 500 Composite Index and an index of peer companies (that we selected) for the five-year period commencing December 31, [removed: 2010] [added: 2011] and ending December 31, [removed: 2015.][added: 2016.]

[removed: ][added: ]

| | [removed: 2010 | | | |] 2011 | | | | 2012 | | | | 2013 | | | | 2014 | | | | 2015 | | | [added: | 2016 | | |]

| 1 | Assumes that an investment in Valero common stock and each index was $100 on December 31, [removed: 2010.] [added: 2011.] “Cumulative total return” is based on share price appreciation plus reinvestment of dividends from December 31, [removed: 2010] [added: 2011] through December 31, [removed: 2015.] [added: 2016.] |

| 2016: | | | | | | | | | | | | |

| December 31 | | $ | 69.85 | | | $ | 52.51 | | | $ | 0.60 | |

| September 30 | | 58.08 | | | | 46.88 | | | | 0.60 | | |

| June 30 | | 64.06 | | | | 49.91 | | | | 0.60 | | |

| March 31 | | 72.49 | | | | 52.55 | | | | 0.60 | | |

Dividends are considered quarterly by the board of directors, may be paid only when approved by the board, and will depend on our financial condition, results of operations, cash flows, prospects, industry conditions, capital requirements, and other factors and restrictions our board deems relevant.

There can be no assurance that we will pay a dividend at the rates we have paid historically, or at all, in the future.

| October 2016 | | 433,272 | | | $ | 52.69 | | | 50,337 | | | 382,935 | | | $2.7 billion |

| November 2016 | | 667,644 | | | $ | 62.25 | | | 248,349 | | | 419,295 | | | $2.6 billion |

| December 2016 | | 1,559,569 | | | $ | 66.09 | | | 688 | | | 1,558,881 | | | $2.5 billion |

| Total | | 2,660,485 | | | $ | 62.95 | | | 299,374 | | | 2,361,111 | | | $2.5 billion |

| (b) | On July 13, 2015, we announced that our board of directors authorized our purchase of up to $2.5 billion of our outstanding common stock. This authorization has no expiration date. As of December 31, 2016, the approximate dollar value of shares that may yet be purchased under the 2015 authorization is $40 million. On September 21, 2016, we announced that our board of directors authorized our purchase of up to an additional $2.5 billion of our outstanding common stock with no expiration date. As of December 31, 2016, no purchases have been made under the 2016 authorization. |

| Valero Common Stock | $ | 100.00 | | | $ | 166.17 | | | $ | 274.19 | | | $ | 274.85 | | | $ | 403.46 | | | $ | 406.63 | |

| S&P 500 | 100.00 | | | | 116.00 | | | | 153.58 | | | | 174.60 | | | | 177.01 | | | | 198.18 | | |

| Peer Group | 100.00 | | | | 109.23 | | | | 132.93 | | | | 122.45 | | | | 110.45 | | | | 130.66 | | |

| 2014: | | | | | | | | | | | | |

| December 31 | | 52.10 | | | | 42.53 | | | | 0.275 | | |

| September 30 | | 54.61 | | | | 45.73 | | | | 0.275 | | |

| June 30 | | 59.69 | | | | 50.03 | | | | 0.250 | | |

| March 31 | | 55.96 | | | | 45.90 | | | | 0.250 | | |

Dividends are considered quarterly by the board of directors and may be paid only when approved by the board.

| October 2015 | | 1,658,771 | | | $ | 62.12 | | | 842,059 | | | 816,712 | | | $2.0 billion |

| November 2015 | | 2,412,467 | | | $ | 71.08 | | | 212,878 | | | 2,199,589 | | | $1.8 billion |

| December 2015 | | 7,008,414 | | | $ | 70.31 | | | 980 | | | 7,007,434 | | | $1.3 billion |

| Total | | 11,079,652 | | | $ | 69.25 | | | 1,055,917 | | | 10,023,735 | | | $1.3 billion |

| (b) | On July 13, 2015, we announced that our board of directors approved our purchase of $2.5 billion of our outstanding common stock (with no expiration date), which was in addition to the remaining amount available under our $3 billion program previously authorized. During the third quarter of 2015, we completed our purchases under the $3 billion program. As of December 31, 2015, we had $1.3 billion remaining available for purchase under the $2.5 billion program. |

| Valero Common Stock | $ | 100.00 | | | $ | 92.15 | | | $ | 153.13 | | | $ | 252.67 | | | $ | 253.28 | | | $ | 371.80 | |

| S&P 500 | 100.00 | | | | 102.11 | | | | 118.45 | | | | 156.82 | | | | 178.29 | | | | 180.75 | | |

| Peer Group | 100.00 | | | | 107.70 | | | | 117.64 | | | | 143.16 | | | | 131.88 | | | | 118.95 | | |

The selected financial data for the five-year period ended December 31, [removed: 2015] [added: 2016] was derived from our audited financial statements.

| | [removed: 2015] [added: 2016] (a) | | | | [removed: 2014] [added: 2015 (b)] | | | | [removed: 2013 (b)] [added: 2014] | | | | [removed: 2012] [added: 2013 (c)] | | | | [removed: 2011 (c)] [added: 2012] | | |

| Operating revenues | $ | [removed: 87,804] [added: 75,659] | | | $ | [removed: 130,844] [added: 87,804] | | | $ | [removed: 138,074] [added: 130,844] | | | $ | [removed: 138,393] [added: 138,074] | | | $ | [removed: 120,607] [added: 138,393] | |

| Income from continuing operations | [removed: 4,101] [added: 2,417] | | | | [removed: 3,775] [added: 4,101] | | | | [removed: 2,722] [added: 3,775] | | | | [removed: 3,114] [added: 2,722] | | | | [removed: 2,336] [added: 3,114] | | |

| Earnings per common share from continuing operations – assuming dilution | [removed: 7.99] [added: 4.94] | | | | [removed: 6.97] [added: 7.99] | | | | [removed: 4.96] [added: 6.97] | | | | [removed: 5.61] [added: 4.96] | | | | [removed: 4.11] [added: 5.61] | | |

| Dividends per common share | [removed: 1.70] [added: 2.40] | | | | [removed: 1.05] [added: 1.70] | | | | [removed: 0.85] [added: 1.05] | | | | [removed: 0.65] [added: 0.85] | | | | [removed: 0.30] [added: 0.65] | | |

| Debt and capital lease obligations, less current portion [added: (d)] | [removed: 7,250] [added: 7,886] | | | | [removed: 5,780] [added: 7,208] | | | | [removed: 6,261] [added: 5,747] | | | | [removed: 6,463] [added: 6,224] | | | | [removed: 6,732] [added: 6,423] | | |

| (a) | Includes a noncash lower of cost or market inventory valuation [added: reserve] adjustment [added: that resulted in a net benefit to our results] of [removed: $790 million,] [added: operations of $747 million] as described in Note [removed: 6] [added: 4] of Notes to Consolidated Financial Statements. |

| [removed: (b)] [added: (c)] | Includes the operations of our retail business prior to its separation from us on May 1, [removed: 2013, as further described in Note 3 of Notes to Consolidated Financial Statements.] [added: 2013.] |

| Total assets (d) | 46,173 | | | | 44,227 | | | | 45,355 | | | | 46,957 | | | | 44,163 | | |

| (b) | Includes a noncash lower of cost or market inventory valuation adjustment that resulted in a net charge to our results of operations of $790 million. |

| | |

| --- | --- |

| (d) | Amounts reported as of December 31, 2015, 2014, 2013, and 2012 have been reclassified to reflect the retrospective adoption of certain amendments to the Accounting Standards Codification as of January 1, 2016 as described in Note 1 of Notes to Consolidated Financial Statements. |

| Total assets | 44,343 | | | | 45,550 | | | | 47,260 | | | | 44,477 | | | | 42,783 | | |

| (c) | We acquired the Meraux Refinery on October 1, 2011 and the Pembroke Refinery on August 1, 2011. The information presented for 2011 includes the results of operations from these acquisitions commencing on their respective acquisition dates. |

Our management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) for [removed: Valero.][added: Valero Energy Corporation.]

Our management evaluated the effectiveness of Valero’s internal control over financial reporting as of December 31, [removed: 2015.][added: 2016.]

Management believes that as of December 31, [removed: 2015,] [added: 2016,] our internal control over financial reporting was effective based on those criteria.

Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting, which begins on page [removed: 57] [added: 68] of this report.

We have audited the accompanying consolidated balance sheets of Valero Energy Corporation and subsidiaries [removed: (the Company)] as of December 31, [removed: 2015] [added: 2016] and [removed: 2014,] [added: 2015,] and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, [removed: 2015.][added: 2016.]

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Valero Energy Corporation and subsidiaries as of December 31, [removed: 2015] [added: 2016] and [removed: 2014,] [added: 2015,] and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, [removed: 2015,] [added: 2016,] in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the PCAOB, [removed: the Company’s] [added: Valero Energy Corporation’s] internal control over financial reporting as of December 31, [removed: 2015,] [added: 2016,] based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February [removed: 25, 2016] [added: 23, 2017] expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

We have audited Valero Energy [removed: Corporation (the Company’s)] [added: Corporation’s] internal control over financial reporting as of December 31, [removed: 2015,] [added: 2016,] based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, Valero Energy Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, [removed: 2015,] [added: 2016,] based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

We also have audited, in accordance with the standards of the PCAOB, the consolidated balance sheets of Valero Energy Corporation and subsidiaries as of December 31, [removed: 2015] [added: 2016] and [removed: 2014,] [added: 2015,] and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, [removed: 2015,] [added: 2016,] and our report dated February [removed: 25, 2016] [added: 23, 2017] expressed an unqualified opinion on those consolidated financial statements.

[removed: VALERO ENERGY CORPORATION][added: Valero Energy Partners LP Units]

| | [added: 2016 | | | |] 2015 | | | | 2014 | | |

| Cash and temporary cash investments | $ | [removed: 4,114] [added: 4,816] | | | $ | [removed: 3,689] [added: 4,114] | |

| Receivables, net | [removed: 4,464] [added: 5,901] | | | | [removed: 5,879] [added: 4,464] | | |

| Inventories | [removed: 5,898] [added: 5,709] | | | | [removed: 6,623] [added: 5,898] | | |

| Income taxes receivable | [removed: 218] [added: 58] | | | | [removed: 97] [added: 218] | | |

| [removed: Deferred] [added: Current deferred] income taxes | [added: $ |] 74 | | | [added: $] | [removed: 162] [added: (74] | [added: )] | | [added: $ | — | |]

| Prepaid expenses and other | [removed: 204] [added: 316] | | | | [removed: 164] [added: 204] | | |

| Total current assets | [removed: 14,972] [added: 16,800] | | | | [removed: 16,614] [added: 14,898] | | |

| Property, plant, and equipment, at cost | [removed: 36,907] [added: 37,733] | | | | [removed: 35,933] [added: 36,907] | | |

| Accumulated depreciation | [removed: (10,204] [added: (11,261] | | ) | | [removed: (9,198] [added: (10,204] | | ) |

| Property, plant, and equipment, net | [removed: 26,703] [added: 26,472] | | | | [removed: 26,735] [added: 26,703] | | |

| Deferred charges and other assets, net | 2,668 | | | | [removed: 2,201] [added: (42] | | [added: )] | [added: | 2,626 | | |]

| Current portion of debt and capital lease obligations | $ | [removed: 127] [added: 115] | | | $ | [removed: 606] [added: 127] | |

| Accounts payable | [removed: 4,907] [added: 6,357] | | | | [removed: 6,760] [added: 4,907] | | |

| Accrued expenses | [removed: 554] [added: 694] | | | | [removed: 596] [added: 554] | | |

| Taxes other than income taxes | [removed: 1,069] [added: 1,084] | | | | [removed: 1,209] [added: 1,069] | | |

| Income taxes payable | [removed: 337] [added: 78] | | | | [removed: 433] [added: 337] | | |

| [removed: Deferred] [added: Current deferred] income taxes | 366 | | | | [removed: 376] [added: (366] | | [added: )] | [added: | — | | |]

| Total current liabilities | [removed: 7,360] [added: 8,328] | | | | [removed: 9,980] [added: 6,994] | | |

| Debt and capital lease obligations, less current portion | 7,250 | | | | [removed: 5,780] [added: (42] | | [added: )] | [added: | 7,208 | | |]

| Deferred income taxes | 6,768 | | | | [removed: 6,607] [added: 292] | | | [added: | 7,060 | | |]

| Other long-term liabilities | [removed: 1,611] [added: 1,744] | | | | [removed: 1,939] [added: 1,611] | | |

| Additional paid-in capital | [removed: 7,064] [added: 7,088] | | | | [removed: 7,116] [added: 7,064] | | |

| Treasury stock, at cost; [removed: 200,462,208] [added: 222,000,024] and [removed: 159,202,872] [added: 200,462,208] common shares | [removed: (10,799] [added: (12,027] | | ) | | [removed: (8,125] [added: (10,799] | | ) |

| Retained earnings | [removed: 25,188] [added: 26,366] | | | | [removed: 22,046] [added: 25,188] | | |

| Accumulated other comprehensive loss | [removed: (933] [added: (1,410] | | ) | | [removed: (367] [added: (933] | | ) |

| Total Valero Energy Corporation stockholders’ equity | [removed: 20,527] [added: 20,024] | | | | [removed: 20,677] [added: 20,527] | | |

| Noncontrolling interests | [removed: 827] [added: 830] | | | | [removed: 567] [added: 827] | | |

| Total equity | [removed: 21,354] [added: 20,854] | | | | [removed: 21,244] [added: 21,354] | | |

February 23, 2017

February 23, 2017

| | 2016 | | | | 2015 | | |

| Deferred charges and other assets, net | 2,901 | | | | 2,626 | | |

| Total assets | $ | 46,173 | | | $ | 44,227 | |

| Debt and capital lease obligations, less current portion | 7,886 | | | | 7,208 | | |

| Deferred income taxes | 7,361 | | | | 7,060 | | |

| Asset impairment loss | 56 | | | | — | | | | — | | |

| Net income | — | | | | — | | | | — | | | | 2,289 | | | | — | | | | 2,289 | | | | 128 | | | | 2,417 | | |

| Balance as of December 31, 2016 | $ | 7 | | | $ | 7,088 | | | $ | (12,027 | ) | | $ | 26,366 | | | $ | (1,410 | ) | | $ | 20,024 | | | $ | 830 | | | $ | 20,854 | |

| Net income | $ | 2,417 | | | $ | 4,101 | | | $ | 3,711 | |

| Depreciation and amortization expense | 1,894 | | | | 1,842 | | | | 1,690 | | |

| Lower of cost or market inventory valuation adjustment | (747 | | ) | | 790 | | | | — | | |

| Asset impairment loss | 56 | | | | — | | | | — | | |

| Distributions to other noncontrolling interests | (35 | | ) | | (25 | | ) | | — | | |

Description of Business

We are an independent petroleum refiner and ethanol producer.

Most of our logistics assets support our refining operations, and some of these assets are owned by Valero Energy Partners LP (VLP).

See Note 11 for further discussion about VLP.

We sell our ethanol in the wholesale bulk market, and some of our logistics assets support our ethanol operations.

We operated under two reportable segments, refining and ethanol.

See Note 16 for additional information about our segments.

These consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP) and with the rules and regulations of the Securities and Exchange Commission.

Certain amounts reported as of December 31, 2015 have been reclassified to conform to the 2016 presentation, including the retrospective adoption of certain amendments to the Accounting Standards Codification (ASC) effective January 1, 2016.

The adoption of Accounting Standards Update (ASU) No. 2015-15, “Interest–Imputation of Interest (Subtopic 835-30),” resulted in the reclassification of certain debt issuance costs from “deferred charges and other assets, net” to “debt and capital lease obligations, less current portion.” The adoption of ASU 2015-17, “Income Taxes (Topic 740)” resulted in the reclassification of current deferred income tax assets and current deferred income tax liabilities to noncurrent deferred income tax liabilities.

The following table presents our previously reported balance sheet line items retrospectively adjusted for the adoption of these pronouncements (in millions):

| | Previously Reported | | | | Reclassifications | | | | Currently Reported | | |

| Assets | | | | | | | | | | | |

| Liabilities | | | | | | | | | | | |

These financial statements include the accounts of Valero, our subsidiaries, and the accounts of partnerships and joint ventures that we control through an ownership interest greater than 50 percent or through a controlling financial interest with respect to our variable interest entities (VIEs).

Our VIEs are described in Note 11.

are continuously improved.

We present excise taxes on sales by certain of our international operations on a gross basis in revenues.

To the degree that we are unable to blend biofuels at the required percentage, we must purchase biofuel credits to meet our obligation.

These programs are further described in Note 19 under “Environmental Compliance Program Price Risk.”

of each award or (b) the period from the grant date to the date retirement eligibility is achieved if that date is expected to occur during the vesting period established in the award.

To manage commodity price risk, we use economic hedges, which are not designated as fair value or cash flow hedges, and we use fair value and cash flow hedges from time to time.

Accounting Pronouncements Not Yet Adopted

We recently completed our evaluation of the provisions of this ASU and concluded that our adoption of the ASU will not materially change the amount or timing of revenues recognized by us, nor will it materially affect our financial position.

The majority of our revenues are generated from the sale

February 25, 2016

| Total assets | $ | 44,343 | | | $ | 45,550 | |

| Gain on disposition of retained interest in CST Brands, Inc. | — | | | | — | | | | 325 | | |

| Balance as of December 31, 2012 | $ | 7 | | | $ | 7,322 | | | $ | (6,437 | ) | | $ | 17,032 | | | $ | 108 | | | $ | 18,032 | | | $ | 63 | | | $ | 18,095 | |

| Net income | — | | | | — | | | | — | | | | 2,720 | | | | — | | | | 2,720 | | | | 8 | | | | 2,728 | | |

| Separation of retail business | — | | | | (9 | | ) | | 9 | | | | (320 | | ) | | (159 | | ) | | (479 | | ) | | — | | | | (479 | | ) |

| Gain on disposition of retained interest in CST Brands, Inc. | — | | | | — | | | | (325 | | ) |

| Net proceeds from issuance of Valero Energy Partners LP common units | 189 | | | | — | | | | 369 | | |

| Distribution to other noncontrolling interest | (25 | | ) | | — | | | | — | | |

| Disposition of retail business: | | | | | | | | | | | |

| Proceeds from short-term debt in anticipation of separation | — | | | | — | | | | 550 | | |

| Cash distributed to Valero by CST Brands, Inc. | — | | | | — | | | | 500 | | |

| Cash held and retained by CST Brands, Inc. upon separation | — | | | | — | | | | (315 | | ) |

| Proceeds from short-term debt related to disposition of retained interest | — | | | | — | | | | 525 | | |

| Repayments of short-term debt related to disposition of retained interest | — | | | | — | | | | (58 | | ) |

Our operations are affected by:

| • | company-specific factors, primarily refinery utilization rates and refinery maintenance turnarounds; |

| • | seasonal factors, such as the demand for refined products during the summer driving season and heating oil during the winter season; and |

| • | industry factors, such as movements in and the level of crude oil prices including the effect of quality differentials between grades of crude oil, the demand for and prices of refined products, industry supply capacity, and competitor refinery maintenance turnarounds. |

Certain amounts reported as of and for the year ended December 31, 2014 have been reclassified to conform to the 2015 presentation.

These financial statements include the accounts of Valero, its subsidiaries, and entities in which Valero has a controlling financial interest.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

income.

| • | intangible assets; and |

| • | re-imaging costs associated with branded outlets. |

to a formal plan of action.

When we enter into a derivative instrument, it is designated as a fair value hedge, a cash flow hedge, an economic hedge, or a trading derivative.

The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized currently in income in the same period.

The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is initially reported as a component of other comprehensive income and is then recorded in income in the period or periods during which the hedged forecasted transaction affects income.

The ineffective portion of the gain or loss on the cash flow derivative instrument, if any, is recognized in income as incurred.

For our economic hedging relationships (derivative instruments not designated as fair value or cash flow hedges) and for derivative instruments entered into for trading purposes, the derivative instrument is recorded at fair value and changes in the fair value of the derivative instrument are recognized currently in income.

New Accounting Pronouncements

The core principle of the new standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The standard also requires improved interim and annual disclosures that enable the users of financial statements to better understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers.

In July 2015, the effective date of the new standard was deferred by one year.

As a result, the standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those reporting periods, and can be adopted either retrospectively to each prior reporting period presented using a practical expedient, as allowed by the standard, or retrospectively with a cumulative-effect adjustment to retained earnings as of the date of initial application.

In February 2015, the provisions of ASC Topic 810, “Consolidation,” were amended to improve consolidation guidance for certain types of legal entities.

The guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and provides a scope exception from consolidation guidance

for certain money market funds.

These provisions may also be adopted retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated.

Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures were effective as of December 31, [removed: 2015.][added: 2016.]

The management report on Valero’s internal control over financial reporting required by Item 9A appears in Item 8 on page [removed: 55] [added: 66] of this report, and is incorporated herein by reference.

KPMG LLP’s report on Valero’s internal control over financial reporting appears in Item 8 beginning on page [removed: 57] [added: 68] of this report, and is incorporated herein by reference.

The information required by Items 10 through 14 of Form 10-K is incorporated herein by reference to the definitive proxy statement for our [removed: 2016] [added: 2017] annual meeting of stockholders.

We will file the proxy statement with the SEC on or before March 31, [removed: 2016.][added: 2017.]

| [Management’s report on internal control over financial [removed: reporting](#sBD45B93DBE7C56ADB75F6C78156B6A8D)] [added: reporting](#s9BE9632039CC5BB692F0D99F10727D7A)] | [removed: [55](#sBD45B93DBE7C56ADB75F6C78156B6A8D)] [added: [66](#s9BE9632039CC5BB692F0D99F10727D7A)] |

| [Reports of independent registered public accounting [removed: firm](#sD63E8B08C9BE54869638526BACC62BD5)] [added: firm](#s01F0ADF381E6587DB460B7460E0D5C80)] | [removed: [56](#sD63E8B08C9BE54869638526BACC62BD5)] [added: [67](#s01F0ADF381E6587DB460B7460E0D5C80)] |

| [Consolidated balance sheets as of December 31, [removed: 2015] [added: 2016] and [removed: 2014](#s2B30A99A035D5FA182E1F273F3E0CD4D)] [added: 2015](#sA1141206CEB85D6FA5A023649AC35AE9)] | [removed: [59](#s2B30A99A035D5FA182E1F273F3E0CD4D)] [added: [70](#sA1141206CEB85D6FA5A023649AC35AE9)] |

| [Consolidated statements of income for the years ended December 31, [added: 2016,] 2015, [removed: 2014,] and [removed: 2013](#sA4606CBE057B53199F0E47568E9D0B0C)] [added: 2014](#s04037A5A499B5E2C9F43A02960557C12)] | [removed: [60](#sA4606CBE057B53199F0E47568E9D0B0C)] [added: [71](#s04037A5A499B5E2C9F43A02960557C12)] |

| [removed: Consolidated] [added: [Consolidated] statements of comprehensive income for the years ended December 31, [added: 2016,] 2015, [removed: 2014,] and [removed: 2013] [added: 2014](#s76A404D4F16F581D8F1F9AC34C91B125)] | [removed: [61](#s42CC1DDAD6375DC9A151B0387F40A43D)] [added: [72](#s76A404D4F16F581D8F1F9AC34C91B125)] |

| [Consolidated statements of equity for the years ended December 31, [added: 2016,] 2015, [removed: 2014,] and [removed: 2013](#s7B681DE8C6125A0D9FE105DB7FD4E38E)] [added: 2014](#sD0DB4CF5EC9050459A033AA4D8DC9358)] | [removed: [62](#s7B681DE8C6125A0D9FE105DB7FD4E38E)] [added: [73](#sD0DB4CF5EC9050459A033AA4D8DC9358)] |

| [Consolidated statements of cash flows for the years ended December 31, [added: 2016,] 2015, [removed: 2014,] and [removed: 2013](#s4C34E5DE9969598082DABB3210197FD0)] [added: 2014](#s3223C640FEEB5DBE92A014602C2659DF)] | [removed: [63](#s4C34E5DE9969598082DABB3210197FD0)] [added: [74](#s3223C640FEEB5DBE92A014602C2659DF)] |

| [Notes to consolidated financial [removed: statements](#s55AA914C69195ED79DB4D30873D72AFD)] [added: statements](#s9DB046DCBB9D5C5B84927A308F4A99DD)] | [removed: [64](#s55AA914C69195ED79DB4D30873D72AFD)] [added: [75](#s9DB046DCBB9D5C5B84927A308F4A99DD)] |

| 3.01 | | [removed: \--] [added: —] | Amended and Restated Certificate of Incorporation of Valero Energy Corporation, formerly known as Valero Refining and Marketing Company–incorporated by reference to Exhibit 3.1 to Valero’s Registration Statement on Form S-1 (SEC File No. 333-27013) filed May 13, 1997. |

| 3.02 | | [removed: \--] [added: —] | Certificate of Amendment (July 31, 1997) to Restated Certificate of Incorporation of Valero Energy Corporation–incorporated by reference to Exhibit 3.02 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2003 (SEC File No. 1-13175). |

| 3.03 | | [removed: \--] [added: —] | Certificate of Merger of Ultramar Diamond Shamrock Corporation with and into Valero Energy Corporation dated December 31, 2001–incorporated by reference to Exhibit 3.03 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2003 (SEC File No. 1-13175). |

| 3.04 | | [removed: \--] [added: —] | Amendment (effective December 31, 2001) to Restated Certificate of Incorporation of Valero Energy Corporation–incorporated by reference to Exhibit 3.1 to Valero’s Current Report on Form 8-K dated December 31, 2001, and filed January 11, 2002 (SEC File No. 1-13175). |

| 3.05 | | [removed: \--] [added: —] | Second Certificate of Amendment (effective September 17, 2004) to Restated Certificate of Incorporation of Valero Energy Corporation–incorporated by reference to Exhibit 3.04 to Valero’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (SEC File No. 1-13175). |

| 3.06 | | [removed: \--] [added: —] | Certificate of Merger of Premcor Inc. with and into Valero Energy Corporation effective September 1, 2005–incorporated by reference to Exhibit 2.01 to Valero’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (SEC File No. 1-13175). |

| 3.07 | | [removed: \--] [added: —] | Third Certificate of Amendment (effective December 2, 2005) to Restated Certificate of Incorporation of Valero Energy Corporation–incorporated by reference to Exhibit 3.07 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2005 (SEC File No. 1-13175). |

| 3.08 | | [removed: \--] [added: —] | Fourth Certificate of Amendment (effective May 24, 2011) to Restated Certificate of Incorporation of Valero Energy Corporation–incorporated by reference to Exhibit 4.8 to Valero’s Current Report on Form 8-K dated and filed May 24, 2011 (SEC File No. 1-13175). |

| [removed: 3.09] [added: 3.10] | | [removed: \--] [added: —] | Amended and Restated Bylaws of Valero Energy Corporation–incorporated by reference to Exhibit 3.01 to Valero’s Current Report on Form 8-K dated [removed: January] [added: September] 21, 2016 and filed [removed: January 26,] [added: September 27,] 2016 (SEC File No. 1-13175). |

| 4.01 | | [removed: \--] [added: —] | Indenture dated as of December 12, 1997 between Valero Energy Corporation and The Bank of New York–incorporated by reference to Exhibit 3.4 to Valero’s Registration Statement on Form S-3 (SEC File No. 333-56599) filed June 11, 1998. |

| 4.02 | | [removed: \--] [added: —] | First Supplemental Indenture dated as of June 28, 2000 between Valero Energy Corporation and The Bank of New York (including Form of 7 3/4% Senior Deferrable Note due 2005)–incorporated by reference to Exhibit 4.6 to Valero’s Current Report on Form 8-K dated June 28, 2000, and filed June 30, 2000 (SEC File No. 1-13175). |

| 4.03 | | [removed: \--] [added: —] | Indenture (Senior Indenture) dated as of June 18, 2004 between Valero Energy Corporation and Bank of New York–incorporated by reference to Exhibit 4.7 to Valero’s Registration Statement on Form S-3 (SEC File No. 333-116668) filed June 21, 2004. |

| 4.04 | | [removed: \--] [added: —] | Form of Indenture related to subordinated debt securities–incorporated by reference to Exhibit 4.8 to Valero’s Registration Statement on Form S-3 (SEC File No. 333-116668) filed June 21, 2004. |

| 4.05 | | [removed: \--] [added: —] | Specimen Certificate of Common Stock–incorporated by reference to Exhibit 4.1 to Valero’s Registration Statement on Form S-3 (SEC File No. 333-116668) filed June 21, 2004. |

| +10.01 | | [removed: \--] [added: —] | Valero Energy Corporation Annual Bonus Plan, amended and restated as of July 29, 2009–incorporated by reference to Exhibit 10.01 to Valero’s Current Report on Form 8-K dated July 29, 2009, and filed August 4, 2009 (SEC File No. 1-13175). |

| +10.02 | | [removed: \--] [added: —] | Valero Energy Corporation Annual Incentive Plan for Named Executive Officers–incorporated by reference to Exhibit 10.01 to Valero’s Current Report on Form 8-K dated February 22, 2012, and filed February 27, 2012 (SEC File No. 1-13175). |

| +10.03 | | [removed: \--] [added: —] | Valero Energy Corporation 2005 Omnibus Stock Incentive Plan, amended and restated as of October 1, 2005–incorporated by reference to Exhibit 10.02 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2009 (SEC File No. 1-13175). |

| [removed: *+10.04] [added: +10.04] | | [removed: \--] [added: —] | Valero Energy Corporation 2011 Omnibus Stock Incentive Plan, amended and restated February 25, [removed: 2016.] [added: 2016–incorporated by reference to Exhibit 10.04 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2015 (SEC File No. 1-13175).] |

| +10.05 | | [removed: \--] [added: —] | Valero Energy Corporation Deferred Compensation Plan, amended and restated as of January 1, 2008–incorporated by reference to Exhibit 10.04 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2008 (SEC File No. 1-13175). |

| *+10.06 | | [removed: \--] [added: —] | Form of Elective Deferral Agreement pursuant to the Valero Energy Corporation Deferred Compensation Plan. |

| *+10.07 | | [removed: \--] [added: —] | Form of Investment Election Form pursuant to the Valero Energy Corporation Deferred Compensation Plan. |

| *+10.08 | | [removed: \--] [added: —] | Form of Distribution Election Form pursuant to the Valero Energy Corporation Deferred Compensation Plan. |

| +10.09 | | [removed: \--] [added: —] | Valero Energy Corporation Amended and Restated Supplemental Executive Retirement Plan, amended and restated as of November 10, 2008–incorporated by reference to Exhibit 10.08 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2008 (SEC File No. 1-13175). |

| +10.10 | | [removed: \--] [added: —] | Valero Energy Corporation Excess Pension Plan, as amended and restated effective December 31, 2011–incorporated by reference to Exhibit 10.10 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2011 (SEC File No. 1-13175). |

| +10.11 | | [removed: \--] [added: —] | Form of Indemnity Agreement between Valero Energy Corporation (formerly known as Valero Refining and Marketing Company) and certain officers and directors–incorporated by reference to Exhibit 10.8 to Valero’s Registration Statement on Form S-1 (SEC File No. 333-27013) filed May 13, 1997. |

| +10.13 | | [removed: \--] [added: —] | Form of Change of Control Severance Agreement (Tier I) between Valero Energy Corporation and executive officer–incorporated by reference to Exhibit 10.15 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2011 (SEC File No. 1-13175). |

| [removed: *+10.14] [added: *+10.19] | | [removed: \--] [added: —] | Schedule of [added: Tier II-A] Change of Control Severance [removed: Agreements (Tier I).] [added: Agreements.] |

| +10.15 | | [removed: \--] [added: —] | Form of Change of Control Severance Agreement (Tier II) between Valero Energy Corporation and executive officer–incorporated by reference to Exhibit 10.16 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2013 (SEC File No. 1-13175). |

| +10.17 | | [removed: \--] [added: —] | Form of Amendment [added: (dated January 7, 2013)] to Change of Control Severance Agreements (to eliminate excise tax gross-up benefit)–incorporated by reference to Exhibit 10.17 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2012 (SEC File No. 1-13175). |

| [removed: +10.19] [added: +10.21] | | [removed: \--] [added: —] | Form of Performance Share Award Agreement pursuant to the Valero Energy Corporation 2011 Omnibus Stock Incentive Plan–incorporated by reference to Exhibit 10.19 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2013 (SEC File No. 1-13175). |

| [removed: +10.20] [added: +10.22] | | [removed: \--] [added: —] | Form of Performance Share Award Agreement (with Dividend Equivalent Award) pursuant to the Valero Energy Corporation 2011 Omnibus Stock Incentive Plan–incorporated by reference to Exhibit 10.20 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2014 (SEC File No. 1-13175). |

| [removed: +10.21] [added: +10.23] | | [removed: \--] [added: —] | Form of Stock Option Agreement pursuant to the Valero Energy Corporation 2011 Omnibus Stock Incentive Plan–incorporated by reference to Exhibit 10.21 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2011 (SEC File No. 1-13175). |

| 3.09 | | — | Fifth Certificate of Amendment (effective May 13, 2016) to Restated Certificate of Incorporation of Valero Energy Corporation–incorporated by reference to Exhibit 3.02 to Valero’s Current Report on Form 8-K dated May 12, 2016, and filed May 18, 2016 (SEC File No. 1-13175). |

| +10.12 | | — | Schedule of Indemnity Agreements–incorporated by reference to Exhibit 10.12 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2015 (SEC File No. 1-13175). |

| +10.14 | | — | Schedule of Tier I Change of Control Severance Agreements–incorporated by reference to Exhibit 10.14 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2015 (SEC File No. 1-13175). |

| +10.16 | | — | Schedule of Tier II Change of Control Severance Agreements–incorporated by reference to Exhibit 10.16 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2015 (SEC File No. 1-13175). |

| +10.18 | | — | Form of Change of Control Severance Agreement (Tier II-A) between Valero Energy Corporation and executive officer–incorporated by reference to Exhibit 10.02 to Valero’s Current Report on Form 8-K dated November 2, 2016, and filed November 7, 2016 (SEC File No. 1-13175). |

| +10.20 | | — | Form of Amendment (dated January 17, 2017) to Change of Control Severance Agreements, amending Section 9 thereof–incorporated by reference to Exhibit 10.01 to Valero’s Current Report on Form 8-K dated and filed January 17, 2017 (SEC File No. 1-13175). |

| | | | |

| | | | |

| | | | |

| /s/ H. Paulett Eberhart | | Director | | February 23, 2017 |

| (H. Paulett Eberhart) | | | | |

| /s/ Kimberly S. Greene | | Director | | February 23, 2017 |

| (Kimberly S. Greene) | | | | |

| | | | | |

| *+10.12 | | \-- | Schedule of Indemnity Agreements. |

| *+10.16 | | \-- | Schedule of Change of Control Severance Agreements (Tier II). |

| *+10.18 | | \-- | Schedule of Amendments to Change of Control Severance Agreements. |

| /s/ Jerry D. Choate | | Director | | February 25, 2016 |

| (Jerry D. Choate) | | | | |